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Economics OCR Paper 1
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Economics OCR Paper 1
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Economics OCR Paper 1Something that motivates an action. In economics, this usually refers to profit, prices, and
social welfare (the objectives of economic agents).
Incentives
- The size of the incentive
- The timescale involved
- The type of good/service
- The objectives of the economic agents
- Other changes in the market/economy
Elements the effectiveness of incentives depends on:
The government controls the factors of production and decides on the allocation of
resources.
Planned Economy
Combination of market forces and government policies that controls the allocation of
resources.
Mixed Economy
Allocation of resources is decided by the interaction of supply and demand (market forces).
Market Economy
- The government can focus resources on where they are most needed in the economy.
- Prices can be controlled so that those most in need can access goods and services.
- Fewer resources are wasted on duplication of goods and services.
- There can be less inequality of income and wealth.
Advantages of a Planned Economy
- The government can decide which resources to control.
- Market forces can be used for goods and services that are considered less important.
Advantages of a Mixed Economy
- Having multiple businesses all competing against one another is likely to lead to lower
average costs.
- Competition between firms can lead to greater efficiency - firms tend to focus on the areas
in which they can be most efficient.
- Firms are more likely to innovate when there is a profit incentive.
, - People have an incentive to work in order to earn money to purchase goods and services.
Advantages of a Market Economy
- The will of the people: Different political systems around the world prioritise different goods
and services.
- Government objectives: Some goods and services are considered particularly beneficial to
society and the control of these goods may be important.
- The availability of resources in a particular economy: E.g., in New York, there is so little
space that the government uses rent control to control the price of accommodation.
In a market economy, which goods are controlled by the government and which are
controlled by the market forces depend upon a number of factors:
A situation where an economic system achieves both allocative and productive efficiency.
Economic Efficiency
A situation where production matches consumer preferences, it is when supply (production)
equals demand (consumer preferences).
Allocative Efficiency
Price = MC
Where is allocative efficiency on a graph?
A situation where all of the resources in society are being used to produce as much as
possible.
Productive efficiency
MC = AC
Where is productive efficiency on a graph?
Responsiveness of a change in one thing to a change in something else.
Elasticity
Measures the responsiveness demand to a change in price.
Price Elasticity of Demand (PED)
percentage change in quantity demanded
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percentage change in price
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